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Before the
              Federal Communications Commission
                    Washington, D.C. 20554



In the Matter of

Policy and Rules Concerning the           
Interstate, Interexchange Marketplace

Implementation of Section 254(g) of the
Communications Act of 1934, as amended

1998 Biennial Regulatory Review --
Review of Customer Premises Equipment
And Enhanced Services Unbundling Rules
In the Interexchange, Exchange Access
And Local Exchange Markets

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CC Docket No. 96-61



CC Docket No. 98-183




                      REPORT AND ORDER 
                               

   Adopted:  March 22, 2001                                                                Released: March 30, 2001

By the Commission:

                      TABLE OF CONTENTS
                           Paragraph
I. INTRODUCTION
1
II. BACKGROUND
2
III. DISCUSSION
  9
    A. Overall Benefits of Bundling CPE and Enhanced Services With Telecommunications
    Services                                                  14
  B.CPE Bundling
     1. CPE Bundling With Interstate, Domestic, Interexchange Service
  19
       a. Competitiveness of the CPE Market
  20
       b. Competitiveness of the Interstate, Domestic, Interexchange Market
  22
       c. Likelihood of Anticompetitive Conduct
  23
     2. CPE Bundling With Local Exchange Service
  30
       a. Competitiveness of Local Exchange Market
  31
       b. Likelihood of Anticompetitive Conduct
          (i) Nondominant LECs
  32
          (ii) Incumbent LECs
  33
  C. Enhanced Services Bundling
  39
     1. Existing Requirements for Nondominant Carriers
  40
     2. Existing Requirements for Dominant Carriers
  42
  D. Universal Service Allocation
  47
  E. Impact of Bundling on Network Disclosure and Part 68 Requirements
     1. CPE Bundling
  55
     2. Enhanced Services Bundling
  58
IV. Final Regulatory Flexibility analysis
  59
V. ORDERING CLAUSES
  65

APPENDIX A: List of Parties
APPENDIX B: Final Rules

     I.   INTRODUCTION
1.     In this proceeding, we eliminate the bundling restriction, adopted in the
Commission's Computer II  proceeding, that limits the ability of common carriers to offer
consumers bundled packages of telecommunications services and customer premises
equipment (CPE) at a discounted price.  We also clarify that under our rules, all facilities-
based carriers may offer bundled packages of enhanced services and basic telecommunications
at a single price, subject to existing safeguards.  Our decision furthers the three goals that we
identified in the Further Notice of Proposed Rulemaking in this docket: it will benefit
consumers by enabling them to take advantage of innovative and attractive packages of
services and equipment; foster increased competition in the markets for CPE, enhanced, and
telecommunications services; and allow us to repeal regulatory requirements that no longer
make sense in light of current technological, market, and legal conditions.  Moreover, the
actions we take in this order further Congress' directive in the Telecommunications Act of
1996 Act (1996 Act) that we repeal or modify any regulation we determine to be no longer in
the public interest.
     II.  bACKGROUND
3.     In 1980, the Commission released its Computer II Order in which it addressed
regulatory issues associated with the convergence of telecommunications and "computer and
data processing."  The cornerstone of the decision is that it distinguished between the
common carrier offering of basic transmission service, which provides a communications path
for the movement of information, and the offering of enhanced services, which then consisted
primarily of data processing services.  Enhanced services are now referred to as "information
services" in the 1996 Act and comprise services such as voice mail, e-mail and other Internet
services, interactive voice response, audiotext information services, and protocol processing,
among others.  
4.     In the Computer II Order, the Commission determined that it would not serve the
public interest to subject enhanced service providers to traditional common carriage regulation
under Title II because, among other things, the enhanced services market was "truly
competitive."  The Commission was concerned, however, that carriers providing both basic
telecommunications services and enhanced services could discriminate against competitive
enhanced service providers that sought to purchase underlying transmission capacity from the
carrier.  It stated that enhanced services are dependent upon the common carrier offering of
basic services and that a basic service is the "building block" upon which enhanced services
are offered.  The Commission said an essential thrust of Computer II was to provide a
mechanism whereby non-discriminatory access can be had to basic transmission services by all
enhanced service providers.  
5.     The Commission implemented enhanced services unbundling requirements to
ensure such nondiscriminatory access to basic services.  For the Bell Operating Companies,
which the Commission found to have sufficient market power on a national scale to engage in
anticompetitive activity, it required that they establish a separate subsidiary to provide
enhanced services.  It also required the subsidiary to acquire its transmission capacity from the
parent company pursuant to tariff.  The Commission explained that this meant that the same
transmission facilities or capacity provided the subsidiary by the parent must be made available
to all enhanced service providers under the same terms and conditions.  For other facilities-
based carriers that lacked market power and therefore were not subject to the separate
subsidiary requirement, the Commission required them to "acquire transmission capacity
pursuant to the same prices, terms, and conditions reflected in their tariffs when their own
facilities are utilized."  The Commission has interpreted this requirement to mean that
"carriers that own common carrier transmission facilities and provide enhanced services must
unbundle basic from enhanced services and offer transmission capacity to other enhanced
service providers under the same tariffed terms and conditions under which they provide such
services to their own enhanced service operations."  The Commission has not changed this
requirement for these carriers. The Commission did replace the separate subsidiary
requirements for the BOCs with nonstructural safeguards established in the Computer III
proceeding because it found that they would perform as well as structural safeguards in
combating discrimination by the BOCs and be less costly.  In doing so, it affirmed and
strengthened the requirement that the BOCs acquire transmission capacity for their own
enhanced services operations under the same tariffed terms and conditions as competitive
enhanced service providers.
6.     The Commission also deregulated CPE in the Computer II Order.  It determined
that the CPE market was becoming increasingly competitive and that in order to increase
further the options that consumers had in obtaining equipment, it would require common
carriers to separate the provision of CPE from the provision of telecommunications services. 
It found that the continued bundling of telecommunications services with CPE could force
customers to purchase unwanted CPE in order to obtain necessary transmission services, thus
restricting customer choice and retarding the development of a competitive CPE market. 
The Commission determined that by separating the provision of CPE from a carrier's
provision of monopoly telecommunications services, consumers would benefit not only
through competitive sources of supply for CPE, but also through the option of leasing or
owning equipment, competitive pricing and payment options, and improved maintenance.  It
codified this "no bundling" requirement in rule section 64.702(e), which requires all common
carriers to sell or lease CPE separate and apart from such carriers' regulated communications
services, and to offer CPE solely on a deregulated nontariffed basis.  As the Commission
pointed out in the Further Notice, this rule does not prohibit carriers from offering "one-stop
shopping for CPE and telecommunications services, but requires only that the goods or
services be priced separately.
7.     Although it imposed bundling restrictions in Computer II, the Commission
recognized that bundling can benefit consumers if the markets for the components of the
bundle are "workably competitive."  For example, bundling may reduce the "transaction
costs" of assembling a desired package of goods and services.  When the markets for both
bundled and unbundled commodities are sufficiently competitive, consumers can decide
whether the benefits of a package exceed the potential benefits of buying the components of
the bundle individually.  The Commission reaffirmed these benefits when it allowed cellular
CPE and cellular service to be offered on a bundled basis.  It found, in particular, that the
price of cellular CPE represented the greatest barrier to inducing subscription to cellular
service and that bundling could be used as an "efficient distribution mechanism" and an
"efficient promotional device" that allows consumers to obtain service and equipment "more
economically than if it were prohibited."  
8.     In light of the increasing competitiveness of the CPE and enhanced services
markets, the Commission, on several occasions, has sought to reexamine the need for the
bundling restrictions.  It first sought comment in 1996 in the Interexchange Notice on its
tentative conclusion to revise the CPE restriction by allowing nondominant interexchange
carriers to bundle CPE with interstate, domestic, interexchange telecommunications services. 
In response to the Interexchange Notice, AT&T suggested that the Commission also allow
nondominant interexchange carriers to bundle enhanced services with interexchange services,
while SBC asserted that the Commission should eliminate the CPE bundling restriction for all
carriers, including incumbent local exchange carriers (LECs).  The bundling restrictions were
among many issues raised in the Interexchange Notice, and although AT&T, SBC and other
commenters addressed bundling, most focused their comments on other issues.  In the
Interexchange Second Report and Order, the Commission therefore deferred action on its
tentative decision to modify the CPE bundling restriction, stating that it would issue a Further
Notice addressing the continued application of both the CPE and enhanced services bundling
restrictions. 
9.     On October 9, 1998, the Commission released a Further Notice seeking comment
on the economic, competitive, and regulatory implications of eliminating our CPE and
enhanced services bundling rules for nondominant interexchange carriers, and nondominant
and incumbent local exchange carriers seeking to offer packages of transmission services,
CPE, and enhanced services.  The Commission also explained in the Further Notice that in
accordance with the requirement in section 161 of the 1996 Act, it had begun a
comprehensive biennial review of telecommunications and other regulations to promote
"meaningful deregulation and streamlining where competition or other considerations warrant
such action," and therefore sought comment on the extent to which the continued application
of both the CPE and enhanced services bundling restrictions are "no longer necessary in the
public interest" pursuant to section 161(a)(2).  
     X.   DISCUSSION
11.    In light of the record developed in response to the Further Notice, we now
conclude that it is appropriate to eliminate the CPE bundling restriction in its entirety and
clarify, but not eliminate, the enhanced services requirement so that all carriers may offer
consumers packages of equipment, enhanced services, and telecommunications services at a
single price.  We find that consumers can benefit significantly by relying on the competitive
markets that exist for the components contained in a bundle, and that as a result of this
competition, and existing safeguards that are applicable in certain instances, we no longer
need to rely on the CPE bundling regulation to ensure that carriers do not restrict consumers
from taking advantage of competitive suppliers of CPE.  We also clarify that under our
existing rules, carriers may offer consumers bundles of enhanced and basic
telecommunications services, subject to existing safeguards, thereby encouraging further
options for consumers.
12.    We discuss initially the public interest benefits of bundling, and find, in particular,
that offering consumers the choice of purchasing packages of products and services at a single
low-rate will encourage them to subscribe to new, advanced, or specialized services by
reducing the costs that they have to pay up-front to purchase equipment, or by giving them a
choice of relying on one provider instead of having to assemble the desired combinations on
their own.  Price bundling also eliminates the transaction costs that carriers have to absorb in
order to comply with the bundling rules, thereby enabling them to offer better prices whenever
possible.  Indeed, facilitating consumer choice is what compels us to take action in this
proceeding.  The state of competition in the CPE and enhanced services markets and in the
telecommunications markets is drastically different from the state of competition in these
markets in 1980.  Unlike in 1980, we now have no doubt that consumers who choose to
purchase CPE or enhanced services on a stand-alone basis may do so from a myriad of
suppliers.  Coupled with this wide choice of CPE and enhanced services suppliers is now a
wide choice of interexchange telecommunications carriers and a growing choice of local
exchange carriers.  Eliminating and clarifying our bundling restrictions will allow the suppliers
of each of these components to compete more freely, making consumers the beneficiaries of
deregulation, as we believe Congress intended when it passed the 1996 Act.
13.    It is also compelling to us that all carriers, both incumbent and nondominant
carriers, in all markets, demonstrate a desire to compete for customers through bundled
service offerings.  We find that it is appropriate to grant bundling relief to all of them, and
address the ability of these carriers to provide specific service combinations.  We find first that
nondominant carriers should be able to offer packages of service that include CPE, enhanced
services, and interstate, domestic, interexchange services at one price.  Because these markets
are competitive, the risk of anticompetitive conduct that the Commission cited originally in
enacting the bundling restrictions has been virtually eliminated.  We also find that it is in the
public interest to allow nondominant carriers to bundle CPE and enhanced services with local
exchange service.  Although the local exchange market is not substantially competitive, the
1996 Act eliminated barriers for carriers seeking to enter this market.  Competitive carriers
have made steady progress in doing so, increasing their market size by 53 percent during the
first half of 2000.  Because these carriers have no market power in the local exchange market,
it is undisputed in the record that they cannot engage in anticompetitive conduct if we grant
them the flexibility to respond to consumer demand for packages that contain local exchange
service.
14.    We further find that incumbent local exchange carriers should be able to offer
packages of service that include CPE, enhanced services, and local exchange service at one
price.  We acknowledge that because the local exchange market is not substantially
competitive and because incumbent LECs have market power, we must balance the risk that
the incumbents can act anticompetitively with the public interest benefits associated with
bundling.  After undertaking this analysis, we conclude that the risk of anticompetitive
behavior by the incumbent LECs is low, not only because of the economic difficulty that even
dominant carriers face in attempting to link forcibly the purchase of one component to
another, but also because of the safeguards that currently exist to protect against this
behavior.  In particular, incumbent LECs will, under state law, offer local exchange service
separately on an unbundled tariffed basis if they bundle such service with CPE.  We also
require them to offer exchange access service and any other service for which the Commission
considers them to be dominant separately on nondiscriminatory terms if they bundle such
service with CPE.  We go on to conclude that the risk is also outweighed by the consumer
benefits of allowing bundling.  In the case of enhanced services, we emphasize that we are not
eliminating at this time the fundamental provisions contained in our Computer II and
Computer III proceedings that facilities-based carriers continue to offer the underlying
transmission service on nondiscriminatory terms, and that competitive enhanced services
providers should therefore continue to have access to this critical input.  
15.    Finally, we address the impact of bundling on our universal service requirements,
and we suggest methods that carriers may use to determine their universal service obligations. 
We also find that permitting carriers to bundle will not impact our Part 68 requirements that
attached CPE not cause harm to the public switched network, and that our network disclosure
rules in Part 51 will ensure that competitive CPE suppliers continue to obtain access to
network information they require from the incumbent carriers.
          A.   Overall Benefits of Bundling CPE and Enhanced Services With
          Telecommunications Services
16.    We conclude that allowing all carriers to bundle products and services is generally
procompetitive and beneficial to consumers.  Bundling encourages competition by giving
carriers flexibility both to differentiate themselves from their competitors and to target
segments of the consumer market with product offerings designed to meet the needs of
individual customers.
17.    We view bundling as the offering of two or more products or services at a single
price, typically less than the sum of the separate prices.  This is different from "one-stop"
shopping arrangements in which consumers may purchase the components of a bundle, priced
separately, from a single supplier.  While "one-stop" shopping is convenient for consumers,
we conclude that they can benefit even more from bundled packages offered at a price
discount.  We agree, in particular, with the commenters who point out that consumers benefit
from bundling because it eliminates the need for carriers to separately provision, market, and
bill services, and therefore reduces the transaction costs that carriers pass on to consumers. 
Indeed, we have recognized that bundling provides benefits that packages of separately priced
services do not, finding in the case of two merged companies that by offering products "as a
package at a price below that of the individual prices of the package's components when sold
separately, the merged firm would both lower costs and pass at least some of those cost
savings on to consumers."  Bundling can further reduce costs for consumers by eliminating
the time and effort needed to find products and services in the market, negotiate appropriate
purchase terms, and assemble the desired combinations.  This is particularly important for
enhanced services and CPE, package components that many consumers may perceive to be
complex. 
18.    We also agree with the commenters who assert that allowing carriers to bundle
transmission services with CPE and enhanced services will enable them to offer innovative
packages of goods and services that will provide customers with efficiencies and pricing that
they demand, and find that the Commission's rules should not unnecessarily restrict
consumer choice in this area.  As far back as 1980, the Commission recognized that "trends in
technology enable CPE to function as an enhancement to basic common carrier services and
many enhanced service applications involve interaction with sophisticated terminal
equipment."  Today, we believe that eliminating and clarifying our bundling restrictions will
encourage the competitive deployment of telecommunications services, enhanced services,
and CPE.  The record shows that consumers want the option to purchase bundled packages of
products and services, and that carriers facing competition in various service markets seek the
ability to respond to this demand.  
19.    In particular, commenting carriers want the ability to bundle Digital Subscriber
Line (DSL) service with CPE and enhanced Internet services for residential customers and
provide other sophisticated service bundles to business customers that offer voice, frame relay
services, enhanced Internet-protocol (IP) services, and other types of basic and enhanced
services.  MCI WorldCom explains that there is a growing number of customers that are
seeking service packages at a single per minute rate in order to achieve the lowest per-unit
cost of service available, as well as the ability to rely on a single provider to implement and
maintain advanced telecommunications networks.  Other commenters assert that they can
reduce start-up costs for consumers by bundling specialized CPE and internet access with
advanced services, thereby stimulating consumer demand for these services.  As we found in
the Cellular Bundling Order, the influx of new subscribers due to the bundling of advanced
telecommunications services with enhanced services and CPE may cause the fixed costs of
providing service to be spread over a larger population of users, achieving economies of scale
and lowering the cost of providing service to each subscriber.
20.    We emphasize that the benefits associated with allowing carriers to bundle
products and services at one price do not exist where the provider maintains sufficient market
power to require that a customer purchase multiple goods or services in order to obtain one of
the components in the package.  Antitrust laws particularly prohibit unlawful tying
arrangements in which the seller has enough market power to force a customer to purchase a
component of the package that he or she would not otherwise purchase in a competitive
market.  Indeed, one of the primary reasons the Commission adopted the Computer II CPE
bundling restrictions was to prevent carriers from forcing consumers to buy unwanted carrier-
supplied CPE in order to obtain transmission service.  On the other hand, allowing carriers
to market products and services together at a single price, but requiring them to offer the
components of the bundle to consumers separately, ensures that carriers cannot restrain
competition or impede consumer choice.  As we explain below, the separate availability of
the components of a package on nondiscriminatory terms, whether through the functioning of
a competitive market for each component or through existing regulatory requirements, is
essential to prevent the improper extension of market power. 
          A.   CPE Bundling
               1.   CPE Bundling with Interstate, Domestic, Interexchange Service
21.    We adopt our tentative conclusion to eliminate the bundling restriction codified in
section 64.702(e) of our rules in order to allow nondominant interexchange carriers to bundle
CPE with their interstate, domestic, interexchange services.  We conclude that both the CPE
market and the interstate, domestic, interexchange market are sufficiently competitive such
that it is extremely unlikely that interexchange carriers could engage in anticompetitive
behavior if we permit them to provide packages of services and CPE bundled at a single price. 
Competition has therefore supplanted the need for the bundling restriction, and we
accordingly repeal it, as Congress intended.  We find that doing so will promptly allow
consumers to pick and choose among service and equipment providers that offer packages
best suited to their needs.

                    a.   Competitiveness of the CPE Market
22.    The Commission explained in the Further Notice that the basis for its tentative
conclusion in the Interexchange Notice to allow nondominant interexchange carriers to bundle
CPE with interstate, domestic, interexchange services is that both the CPE and interstate,
domestic, interexchange markets are substantially competitive and that nondominant
interexchange carriers do not possess market power in the interstate, interexchange market. 
Thus, the Commission tentatively concluded in the Interexchange Notice that allowing such
carriers to bundle CPE with interstate, domestic, interexchange services is unlikely to lead to
the anticompetitive conduct that led the Commission to prohibit the bundling of CPE with
telecommunications services.  The Commission stated in the Further Notice that it would
continue to apply this analysis when determining whether or not to eliminate the CPE bundling
restriction.  
23.    It is undisputed in the record that the CPE market is highly competitive.  The
bundling restrictions were adopted, in part, in recognition that competition was only beginning
to emerge in the CPE market.  In the Computer II Order, the Commission found that the CPE
market faced "an increasing amount of competition as new and innovative types of CPE are
constantly introduced into the marketplace."  The Commission observed subsequently in the
Interexchange Notice that the CPE market is widely recognized to be competitive,  and we
agree with the commenters who point out that this competition has intensified.  Indeed, the
Commission's goal in Computer II to increase consumer choice for innovative CPE and open
equipment markets to full and fair competition has been achieved.  CPE is so widely
available that it has been described as a "commodity industry" in that CPE is available from a
diversity of vendors and prices have been declining steadily for many types of CPE.  AOL
asserts that there has been a proliferation of CPE available to residential and business
consumers that offer them increased control and functionality, and that the broad availability
of CPE has been an important factor in allowing information service providers (ISPs) to
deliver increasingly sophisticated multimedia content to their customers.  The CPE industry
also reported that it expected record sales growth in 2000, especially in the area of computer
modems used to access the Internet.  Indeed, CEMA summarizes that the bundling
restrictions have been highly successful in contributing to the development of a fully
competitive CPE market.
                    a.   Competitiveness of the Interstate, Domestic, Interexchange
                    Market
24.    It is also undisputed that the interstate, domestic, interexchange market is
competitive.  In 1995, the Commission reclassified AT&T as a nondominant interexchange
carrier based on its finding that AT&T lacked unilateral market power in the long distance
market, which it stated was subject to "substantial competition."  It concluded that
competitors in the long distance market had enough readily available excess capacity to
constrain other competitors' pricing behavior, and that both residential and business
customers were highly price sensitive and would switch among competitors to obtain price
reductions and desired features.  When the Commission approved the merger of MCI and
WorldCom in 1998, it found that these competitive market trends continued, and that since
AT&T had been reclassified as nondominant, AT&T's market share had continued to decline
as the number of carriers offering long distance services had risen.  These trends have
continued and, indeed, accelerated since that time.  The Commission has also authorized Bell
Atlantic to provide in-region long distance service in New York and authorized SBC to
provide the same service in Texas, Kansas, and Oklahoma.  Finally, in light of the overall
competitiveness of the market, the Commission has ordered the complete detariffing of
interstate, domestic, interexchange service by nondominant carriers in order to avoid hindering
them from responding competitively to the needs of customers.  In sum, we have previously
found the interstate, domestic, interexchange market to be highly competitive and continue to
do so.
                    a.   Likelihood of Anticompetitive Conduct
25.    In light of our findings that both the CPE and interstate, domestic, interexchange
markets are competitive, we conclude that section 64.702(e) of our rules is no longer
"necessary in the public interest" under section 11 of the Communications Act to the extent
that it prohibits nondominant interexchange carriers from bundling CPE and interstate,
domestic, interexchange service.  The competition in both the CPE and interstate,
interexchange service markets makes it extremely unlikely that nondominant interexchange
carriers could restrict consumer choice for components of a bundle, as the Commission feared
when it adopted the CPE restriction in 1980.  To be sure, the Commission was concerned that
a carrier could refuse to sell one product that a customer desired unless the customer also
agreed to purchase a second product from the carrier.  It is a well established economic
principle, however, that in order for a buyer to be harmed by such an arrangement, the seller
must have market power over the desired product such that the buyer has no choice but to
purchase it from the seller.  Nondominant interexchange carriers have no market power in
either the CPE or interstate, domestic, interexchange markets, making it virtually impossible
for them to require consumers to purchase one bundled product in order to obtain the other. 

26.    We disagree with the few commenters who argue that bundling would allow
carriers to offer packages that combine telecommunications service with "free" CPE in a
manner that would injure competition in the CPE market.  Nondominant interexchange
carriers are unable to harm competition by offering products below cost.  For instance, if a
carrier lacks market power, it cannot raise the rates of its transmission service in order to
support below-cost pricing of CPE.  We agree, in particular, with the commenters who
argue that whatever pricing advantage an interexchange carrier could offer by selling service
and CPE at a bundled discounted price would have to be cost-based or the carrier could not
offer profitably such a bundled discount in the long run.  This inability to engage in
anticompetitive pricing is also inconsistent with the arguments of the few commenters that
claim that a nondominant interexchange carrier would discriminate unreasonably against
customers who agreed to use carrier-provided CPE by offering them transmission service at a
lower price than that offered to non-CPE customers.  To the contrary, eliminating the
bundling restriction should allow these carriers to compete vigorously and fairly in the CPE
and interexchange markets by offering bundles of service and equipment that meet
demonstrated customer demand.
27.    We do not agree with CEMA that eliminating the bundling restrictions for
nondominant interexchange carriers is somehow inconsistent with the procompetitive intent of
Congress, as demonstrated by section 629 of the Communications Act, which relates to the
creation of a competitive retail market for multichannel video programming distribution
system "navigation devices."  The purpose of section 629 is to expand opportunities for
consumers to purchase programming equipment from sources other than the service
provider.  As the Commission stated when it promulgated the rules implementing section
629, competition in the market for navigation devices is "in the early stage of development
and the enormous technological change resulting from the movement from analog to digital
communications is underway." The Commission's rules were designed to facilitate the
emergence of a competitive marketplace for navigation devices.  The statute specifically
provides, moreover, that regulations adopted under section 629 will cease to apply when,
inter alia, the Commission determines that the market for multichannel video programming
distributors and the market for navigation devices are fully competitive.  We also note that a
cable operator will not be subject to the related restrictions on cable equipment pricing
contained in section 623 of the Act and section 76.923(b) of the Commission's rules, where
the Commission finds that the cable operator is subject to effective competition.  The CPE
market is already fully competitive, in large part as a result of the Commission's bundling
policies, and it is therefore unnecessary to retain the bundling restriction for nondominant
interexchange carriers. 
28.    We decline to adopt an "unbundled option" requirement that interexchange
carriers offer interstate, domestic, interexchange services separately on an unbundled basis if
they offer packages of CPE and interexchange service.  In a competitive market, carriers
have an incentive to offer bundles or stand-alone offerings that a customer needs or the
customer will switch to another carrier.  The extensive choice of stand-alone CPE provided
by competitive suppliers and the availability of interexchange service from many competitive
carriers makes it highly unlikely that consumers would be forced to purchase high-cost
interexchange service just because they declined to use carrier-supplied CPE.  Requiring
nondominant interexchange carriers to offer interstate, domestic, interexchange service on an
unbundled basis is therefore unnecessary and would be contrary to the goal of section 11 of
the Act to eliminate regulations that are no longer "necessary in the public interest" as a result
of meaningful competition.  It would also be inconsistent with the Commission's Detariffing
Order in which it found that market forces, as opposed to a tariffing regime, will ensure that
carriers offer services at the prices and on the terms and conditions that consumers demand. 

29.    Contrary to IDCMA's concern, allowing nondominant interexchange carriers to
bundle CPE with interstate, domestic, interexchange services will not require the Commission
to "re-regulate" CPE by ensuring that bundles of CPE and transmission service comply with
the tariff and pricing requirements under Title II of the Act.  In the Computer II Order, the
Commission found that CPE was not a common carrier activity and that charges for CPE
provided by carriers no longer needed to be regulated because of competition in the CPE
market.  Nothing in this Order changes the non common carrier nature of CPE.  Rather, as
argued by U S West, the Commission is not extending the reach of its common carrier
regulation to CPE by allowing bundling because, in effect, the CPE that a carrier offers would
continue to be priced separately from the basic transmission service, but a package discount is
applied when customers purchase both products.  More significantly, the Commission has
found that it should forbear from the requirement that nondominant interexchange carriers file
tariffs pursuant to section 203 of the Act for interstate, domestic, interexchange service, and
in fact will not permit nondominant interexchange carriers to file interstate tariffs for this
service.  Accordingly, interexchange carriers will be unable to tariff such services whether or
not it is bundled with CPE. 
30.    We adopt our tentative conclusion that to the extent the BOCs' section 272
affiliates, as well as independent incumbent LECs' affiliates, are classified as nondominant in
the provision of interstate, domestic, interexchange services, these carriers may bundle CPE
with such services to the same extent as other nondominant carriers.  As we explained in the
Further Notice, the Commission has concluded that the requirements established by, and the
rules implemented pursuant to, sections 271 and 272 of the Act, together with other
Commission rules, limit sufficiently the ability of a BOC's section 272 affiliate to use the
BOC's market power in the local exchange or exchange access market to raise and sustain
prices of interstate, interLATA services above competitive levels.  It has therefore
determined that a BOC entering the in-region interLATA market through a section 272
affiliate will be regulated as a nondominant interexchange carrier.  BOCs providing out-of-
region interstate, domestic, interexchange service are also nondominant.  We agree with
BellSouth that these findings demonstrate that, once a BOC that has satisfied the requirements
of sections 271 and 272 of the Act, its long distance affiliate has the same market
characteristics as any other nondominant interexchange carrier and that there is no basis for
denying them the same bundling relief that we grant to those other carriers.  AT&T is the
only commenter that argued that we should exclude BOC section 272 affiliates from bundling
relief, stating that we need not decide this issue until BOCs obtain approval to provide in-
region interLATA service pursuant to section 271 of the Act.  We have now, of course,
approved section 271 applications for several states, making AT&T's argument moot.  
31.    Similarly, the Commission has also classified independent incumbent LECs'
affiliates as nondominant in the provision of in-region, interstate, interexchange services, and
has required independent incumbent LECs that provide this service solely on a resale basis to
do so through a separate corporate division as opposed to a separate legal entity.  The
Commission found that independent LECs that provide in-region long distance services solely
on a resale basis are less likely to engage in anticompetitive activity than facilities-based
independent providers, thus eliminating the need for a separate affiliate that is a separate legal
entity.  Facilities-based independent LECs that provide in-region long distance services must
do so through separate affiliates that satisfy the requirements established in the Competitive
Carrier Fifth Report and Order.  We conclude that our nondominant classification of
independent LECs that provide in-region, interstate, interexchange service and the separate
entity and affiliate requirements ensure that these incumbent LECs have the same market
characteristics as other nondominant interexchange carriers, and that allowing them to bundle
interstate, domestic, interexchange service with CPE is in the public interest.
               1.   CPE Bundling with Local Exchange Service
32.    We further conclude that it is in the public interest to remove the bundling
restriction to allow all nondominant LECs, or competitive LECs, and incumbent LECs to
bundle CPE and local exchange service.  We recognize that the competitiveness of the local
market has increased only a limited amount during the time since the Commission imposed the
CPE bundling restriction in the Computer II Order and that incumbent LECs have market
power in the provision of local exchange services.  We find, however, that the consumer
benefits of bundling outweigh the risk that incumbent LECs can use this power to harm
competition.  Our risk-benefit analysis is informed by other factors, such as the removal of
barriers to entry in the local market contained in the 1996 Act and the subsequent increase in
local competition, as well as the Commission's decision to lift similar bundling restrictions in
the cellular markets, that tip the balance in favor of lifting the bundling restriction on the
incumbent LECs' provision of local exchange service and CPE.  
                    a.   Competitiveness of Local Exchange Market
33.    We recognize that the local exchange market is not substantially competitive and
that incumbent LECs remain the dominant  providers in this market.  Yet, competitive carriers
have made steady progress in entering the local exchange market since we issued the Further
Notice in 1998.  The Commission's December 2000 report on local competition shows that
competitive LECs provided 6.7 percent of the total nationwide end user telephone lines as of
June 30, 2000.  This represents a 53 percent growth in market size during the first six months
of this year.  The Commission's data also indicate that the rate at which competitive LECs
are providing service using unbundled network elements from the incumbent LECs is
increasing.  The number of lines that incumbent LECs provided as unbundled network
elements doubled in the first half of 2000 from about 1.5 million to 3 million lines.  The
Commission has also approved the entry of Bell Atlantic and SBC into the in-region long
distance markets in New York, Texas, Kansas, and Oklahoma, marking the first time that the
Commission has found that the local markets in those states are open to competition as
required by section 271 of the 1996 Act.  Overall, the local exchange market is clearly more
competitive than the cellular market was at the time that the Commission allowed carriers to
bundle CPE with cellular service.  At that time, the Commission's rules allowed no more than
two facilities-based cellular carriers in each market, and the Commission had determined that
resellers did not compete effectively with these carriers.
                    a.   Likelihood of Anticompetitive Conduct
                         (i)  Nondominant LECs
34.    For most of the same reasons discussed in connection with nondominant
interexchange carriers, we conclude that it is extremely unlikely that any nondominant LEC
would be able to restrict competition if it were permitted to bundle CPE with local exchange
service.  By definition, nondominant carriers do not have market power.  Customers will
switch carriers if nondominant LECs attempt to make them purchase bundles that contain
undesirable CPE product offerings.  At the same time, bundling offers consumers the
benefits that we have identified, and may encourage them to seek competitive alternatives for
local exchange service if competitors can offer this service as part of a package.  No
commenter seriously challenges this conclusion.  Accordingly, we find it in the public interest
and consistent with the purposes of section 11 of the Act to eliminate our restriction on the
bundling of CPE with local exchange service by nondominant LECs.
                         (i)  Incumbent LECs
35.    We also conclude that incumbent LECs may bundle CPE with local exchange
service.  Compared to our prior determinations, an evaluation of whether to eliminate the
restriction on bundling CPE with local exchange service by incumbent LECs requires a more
difficult analysis, and ultimately, a balancing of interests.  Despite the inroads made by
competitors into the local exchange market that we described above, incumbent LECs retain
market power in the provision of local service within their respective territories.  Thus, unlike
our previous analysis of the interexchange market or nondominant LECs, incumbent LECs
possess one of the essential characteristics for engaging in anticompetitive behavior   market
power with respect to one of the components in the bundle.  Nonetheless, we conclude, in
light of the existing circumstances in these markets, that the risk of anticompetitive behavior
by the incumbent LECs in bundling CPE and local exchange service is low and is outweighed
by the consumer benefits of allowing such bundling.  We view the risk as low not only
because of the economic difficulty that even dominant carriers face in attempting to link
forcibly the purchase of one component to another, but also because of the safeguards that
currently exist to protect against this behavior.
36.    We look first at the particular benefits associated with allowing carriers to bundle
CPE with local exchange service.  Although we believe that these benefits accrue equally to
consumers regardless of whether a nondominant LEC or incumbent LEC provides service, we
highlight them here as part of our incumbent LEC analysis.  In particular, incumbent LECs
have asserted that the high price of CPE is one of the greatest barriers to inducing customers
to subscribe to a new service.  Bundling can reduce this barrier by allowing carriers to offer
new customers CPE and local exchange service more economically than if it were prohibited. 
We are particularly persuaded that bundling can promote the deployment of advanced
telecommunications services.  For example, as several commenters explain, many advanced
telecommunications services require specialized CPE that customers would otherwise need to
buy separately because they represent new technologies that traditional CPE does not
support.  By providing the necessary equipment as part of a discounted package, possibly
including leasing or amortizing the purchase of the equipment, a carrier can eliminate some of
the up-front investment cost that inhibits customers from subscribing to the service.  
37.    Indeed, the Commission has recognized that giving consumers the option of
avoiding high up-front expenditures by bundling service and equipment was one of the factors
that contributed to the significant growth in the cellular market.  Deregulation in the
wireline CPE market can offer the same potential to encourage customers to purchase new
services.  An increase in demand for transmission service has the secondary benefit of
expanding the market for related CPE.  For example, the Commission concluded in the
Cellular Bundling Order that bundling would assist the conversion from analog to digital
cellular service.  It stated that because digital handsets, at the time, would be larger, heavier,
and more expensive than analog models, allowing carriers to market attractively priced
packages of new service and equipment would speed the deployment of digital cellular service
and equipment.  Similarly, equipment that customers need to purchase today to access
certain advanced services may be costly, appear technically complicated, and be subject to
frequent design changes or upgrades.  We believe that bundling can encourage demand for
these CPE products and the services they support.  In particular, bundling can reduce the
initial costs of new technology until sufficient demand for it develops, thereby driving down
prices for equipment and services to competitive levels.
38.    In conjunction with these benefits, we recognize risks associated with incumbent
LEC bundling of CPE with local exchange service.  As we stated in the Computer II Order,
there is the risk that an incumbent LEC with market power in the local exchange market could
force a customer to purchase CPE in order to obtain local exchange service.  We must now
take into account, however, that the 1996 Act changed dramatically the telecommunications
landscape by, among other things, removing entry barriers in the local market.  For instance,
section 251 imposes a duty on LECs possessing market power in the local exchange market to
negotiate in good faith and provide interconnection to competitive carriers, and provides a list
of minimum standards that the incumbent LEC must offer, including unbundled access to its
network and interconnection that is at least equal in type, quality, and price that the incumbent
LEC provides to itself or any other party.  Incumbent LECs must also offer for resale at
wholesale rates any retail telecommunications service.  Section 253 of the Act also
mandates that states may not enact any requirement that prohibits or has the effect of
prohibiting any entity from providing interstate or intrastate telecommunications service, and
requires states and localities to manage rights-of-way to which competitors need access in a
competitively-neutral and non-discriminatory manner.  As a result, local competition has
begun to grow as we indicated above.  As this competition increases, we believe that
incumbent LECs will either offer bundled or unbundled packages as consumers demand or
risk losing ground to more responsive competitors.  In addition, we note that since the
Commission lifted restrictions on bundling cellular service and cellular equipment, sales of
cellular telephones and overall subscribership to cellular service have increased dramatically. 
While we recognize that this growth is due to many factors, we view bundling, as we stated
above, as one of the positive factors that encouraged it.  We find all of these changed
circumstances to be persuasive in our decision to allow incumbent LECs to bundle CPE with
local exchange service.
39.    There are also other factors that we take into account in evaluating the ability of
incumbent LECs to act anticompetitively.  In order to harm the vitality of competition in the
CPE market by forcing consumers to purchase a package of CPE and local exchange service,
the incumbent LEC must preempt so many consumers from purchasing competitively-supplied
CPE that not enough remain to support a competitive number of CPE suppliers.  For
example, there is a risk that incumbent LECs could harm CPE competition by requiring
customers that purchase local exchange service from them to also purchase CPE.  Yet, as
Professor Areeda explains, a seller only has an incentive to act in such an anticompetitive
manner if by bundling the product (in this case, CPE) it can reduce costs or otherwise gain by
pricing the product above competitive levels.  If a seller can not do either because the product
is subject to highly competitive prices, then there is little reason to worry about impairing
competition for that product.  Overall, we believe that incumbent LECs do not have the
ability to engage in sustained anticompetitive practices with regard to CPE because even if an
incumbent were to attempt to corner the local retail CPE market and began charging high
CPE prices, other CPE providers could supply retailers with affordable CPE.  Customers
would then be able to purchase the lower-priced CPE and obtain local exchange service at the
same rates as if the customer had bought the CPE from the carrier because local exchange
service will remain available on an unbundled, non-discriminatory basis.  To ensure such
availability, incumbent LECs assert that they are required by state law to offer local exchange
service separately on an unbundled tariffed basis if they bundle such service with CPE.  We
also require incumbent LECs to offer exchange access service and any other service for which
the Commission considers them to be dominant separately on nondiscriminatory terms if they
bundle such service with CPE.  As competition increases, customers will also have the ability
to switch local providers if the incumbent LEC offers unattractive bundled offerings.
40.    An incumbent LEC that seeks to bundle CPE with any regulated transmission
service could potentially offer low-priced CPE by recovering the cost of the CPE through its
regulated rates.  Again, several factors help balance this risk.  Importantly, as we stated above,
where local competition exists, incumbent LECs have a strong incentive to keep local rates
low, not to increase them to support sales of other products or services.  There are also
several existing regulatory safeguards that are in place to address this concern.  The
Commission's Part 64 cost allocation rules require large incumbent LECs to separate their
regulated costs from nonregulated costs and contain multiple provisions, including mandatory
audits, that require them to demonstrate how they are allocating costs between regulated and
unregulated activities.  Consistent with our findings in the Cellular Bundling Order,
incumbent LECs that are subject to price cap regulation in both the state and federal
jurisdictions do not have an incentive to shift unregulated CPE costs because absent a
guaranteed rate-of-return on their local exchange investment, these carriers cannot expect to
recover CPE discounts by including them in their regulated rate base.  There is an increased
risk of cross-subsidization by incumbent LECs still subject to rate-of-return regulation, but the
requirement that incumbent LECs file tariffs and cost support at the state level restricts their
ability to lower prices uneconomically.  As local exchange service becomes more
competitive, we also expect the risk associated with cross-subsidization to decrease.  Overall,
we find that the potential anticompetitive impact of allowing incumbent LECs to bundle local
exchange service with CPE is outweighed by the public interest benefits associated with
bundling.
          A.   Enhanced Services Bundling
41.    In this section, we clarify that there is currently no prohibition on the bundling of
basic telecommunications service and enhanced service at a single, discounted price for any
carrier.  This clarification will allow carriers to offer innovative packages of enhanced services
bundled with basic telecommunications service and CPE.  In order to ensure that competitive
enhanced service providers continue to have non-discriminatory access to the underlying
transmission capacity, we do not eliminate the existing requirement that facilities-based
carriers offer such capacity to these providers on the same terms and conditions under which
they provide such service to their own enhanced service operations.
               1.   Existing Requirements for Nondominant Carriers
42.    We clarify that the requirement in Computer II, that carriers not subject to the
separate subsidiary requirement acquire transmission capacity pursuant to the same prices,
terms, and conditions reflected in their tariffs when their own facilities are used, does not
prohibit them from offering packages of telecommunications service, including interstate,
domestic, interexchange service or local exchange service, and enhanced services at a single
price.  As long as they comply with the requirement to make their underlying transmission
capacity for the enhanced service available on nondiscriminatory terms, it is consistent with
the Commission's reasoning in Computer II to clarify that these carriers may offer bundled
packages.  In particular, the Commission found in Computer II that carriers that had no
control over local bottleneck facilities, and therefore no market power, would not be in a
position to act anticompetitively if they had integrated basic and enhanced services
operations.  It pointed out specifically that any advantages from anticompetitive conduct
"would be short-lived, as customers could readily avail themselves of alternative suppliers." 
The Commission also found that the potential for these carriers to offer innovative services to
a broader range of customers would increase if they were not subject to the structural
separation requirements.  We conclude that a natural outcome of allowing these carriers to
operate on an integrated basis is that they would be able to offer packages of
telecommunications and enhanced services at a single price, and indeed, there is no restriction
against such packaging for these carriers in Computer II, provided that they comply with the
safeguard to make available the underlying transmission capacity for the enhanced service.
43.    We also clarify the scope of the bundling that carriers may undertake.  While
nearly all commenters agree that nondominant carriers should be permitted to bundle
enhanced services with telecommunications services, there is some confusion in the record
regarding the extent to which carriers already bundle these services.  In particular, MCI
WorldCom states that in the Non-Accounting Safeguards Order, the Commission explained
that interLATA information service already includes a bundled interLATA
telecommunications element because information service, itself, is a bundling of
telecommunications service and the computer processing that is necessary to offer the
information-based portion of the service.  In that sense, it points out, all enhanced services are
"bundled" services.  It suggests that carriers should be permitted a greater degree of
enhanced service bundling than simply the bundling that is inherent in the provision of any
interLATA enhanced service.  For example, it states that nondominant interexchange
carriers should be able to bundle enhanced services, such as voice mail, with other separate
interexchange services.  We agree.  The benefits of bundling come from allowing consumers
to purchase an all-inclusive bundle at a single price that consists of interstate, domestic,
interexchange transmission services combined with their choice of enhanced service and CPE.
               1.   Existing Requirements for Dominant Carriers
44.    Unlike nondominant carriers, dominant carriers are restricted under Computer II
from offering enhanced services and basic telecommunications services at a single price.  This
is because dominant carriers that choose to operate pursuant to Computer II, as opposed to
Computer III, are required to maintain a fully separate subsidiary for the provision of
enhanced services with the separate subsidiary having its own operating, marketing,
installation, and maintenance personnel for the services it offers.  The Commission stated
that because of the difficulties that it believed existed in allocating joint and common costs
between such regulated an unregulated entities, it eliminated the allocations by prohibiting any
joint activities in the areas of provisioning or marketing.  The carrier is then also required to
offer its underlying transmission facilities to all competitive enhanced service providers,
including its own subsidiary, on an equal basis.  Under such a regime, the dominant carrier
could not bundle an enhanced service and a basic telecommunications service at a single price.
45.    In Computer III, the Commission replaced the structural safeguards established in
Computer II with nonstructural safeguards, which it found would perform as well in
combating discrimination by the BOCs and be less costly.  In doing so, it allowed BOCs to
integrate their enhanced and basic service operations, but affirmed the requirement that they
acquire transmission capacity under the same tariffed terms and conditions as competitive
enhanced service providers.  This unbundling is accomplished primarily through CEI and
ONA requirements.  The Commission recognized specifically that this integration would
permit the BOCs to "engage in joint marketing of enhanced and basic services."  It is clear,
however, that although BOCs are permitted to market telecommunications services jointly
with enhanced services, they remain obligated to offer the telecommunications service
component separately.  We therefore agree with U S West that BOCs can already jointly
market basic and enhanced services under our existing requirements, but must continue to
offer the basic service separately pursuant to tariff.  Indeed, the BOCs do not advocate that
the Commission eliminate this requirement, but argue instead that we make it clear that they
already may bundle enhanced services with local exchange service at one price in the same
manner that CPE can be bundled.  As we stated above, we agree with this interpretation of
Computer III. 
46.    There are other existing safeguards that are applicable to incumbent LECs that
seek to bundle.  There is no dispute in the record that the BOCs and all incumbent LECs are
required to offer basic local exchange service on an unbundled, tariffed, nondiscriminatory
basis.  Indeed, there is no evidence in the record that these carriers are relieved of this
obligation in any state in which they provide local exchange service.  Customers would
therefore be able to purchase enhanced services from competitive providers and still obtain
local service from the incumbent pursuant to the tariff.  This prevents the incumbent carriers
from discriminating against customers who purchase enhanced service from competitive
suppliers.  As the Commission found in the Cellular Bundling Order, the separate availability
of the transmission service is fundamental to ensuring that dominant carriers cannot
discriminate against customers who do not purchase all the components of a bundle from the
carriers, themselves.  Incumbent LECs are also subject to specific safeguards in sections
260, 274 and 275 of the Act for the provision of telemessaging, electronic publishing and
alarm monitoring services.
47.    In addition, our cost-accounting rules reduce significantly the BOCs' incentive and
ability to misallocate costs between their regulated and unregulated service operations.  We
reject the unsubstantiated arguments of the commenters who contend that our cost allocation
rules will not prevent cross-subsidization.  These rules consist of detailed cost allocation
requirements and related cost accounting safeguards that separate nonregulated enhanced
service costs from regulated service costs, cost accounting mechanisms to enforce the joint
cost rules (including the filing and approval of cost allocation manuals), and the requirement
that carriers submit to independent audits.  The Commission has also found that these cost
allocation safeguards provide sufficient information for the states to protect against cross-
subsidies at the intrastate level.  It explained that the operation of the joint cost and
jurisdictional separations rules result in a BOC intrastate assignment of basic service costs. 
To protect against cross-subsidy of enhanced services by intrastate ratepayers, which is an
important issue if BOCs can bundle interstate enhanced services with local exchange service, a
state need only use its normal regulatory mechanisms to ensure that intrastate rates are not too
high in light of that assignment.
48.    We also emphasize that section 202 applies equally to all carriers, both dominant
and nondominant, that provide transmission service to competitive enhanced service
providers.  In particular, Internet Service Providers have raised issues regarding their ability to
obtain DSL service on nondiscriminatory terms.  The internet service providers require DSL
service to offer competitive internet access service.  We take this issue seriously, and note that
all carriers have a firm obligation under section 202 of the Act to not discriminate in their
provision of transmission service to competitive internet or other enhanced service providers. 
Indeed, the Commission has already found that where there is an incentive for a carrier to
discriminate unreasonably in its provision of basic transmission services used by competitors
to provide enhanced services, section 202 acts as a bar to such discrimination.  In addition,
we would view any such discrimination in pricing, terms, or conditions that favor one
competitive enhanced service provider over another or the carrier, itself, to be an
unreasonable practice under section 201(b) of the Act.  We also note that the Commission's
Title II resale requirements mandate that wireline common carriers provide telecommunication
services to competitors.
          A.   Universal Service Allocation
49.    Section 254 of the Act requires every telecommunications carrier that provides
interstate telecommunications service to "contribute, on an equitable and non-discriminatory
basis, to the specific, predictable, and sufficient mechanisms established by the Commission to
preserve and advance universal service."  The Commission's rules require entities with
interstate end-user revenues to contribute to the universal service fund.  Further,
contributions are based solely on end-user telecommunications revenue, and thus exclude
enhanced services and CPE.  
50.    When carriers generate revenues from stand-alone service or product offerings, the
calculation of their universal service contributions is relatively straightforward.  Carriers
report revenues from telecommunications services and revenues from non-telecommunications
offerings (including CPE and enhanced services revenues) in separate sections of the
Commission's revenue worksheet, which is submitted semi-annually.  Carriers are assessed
universal service contributions only on their revenues from telecommunications services.  If
carriers generate revenues from bundled packages of telecommunications services and
CPE/enhanced services, however, the calculation of their universal service contributions
becomes more complicated.  Thus, we sought comment in the Further Notice on how to
allocate revenue when telecommunication services and CPE/enhanced services are offered as a
bundled package, for purposes of calculating a carrier's universal service contribution.  Only
two carriers commented on this issue.  MCI Worldcom asked the Commission to defer a
decision on this matter to another proceeding, while GTE did not address the funding issues
raised by bundling. 
51.    In this Order, we suggest two methods that contributors may use to allocate
revenue when telecommunication services and CPE/enhanced services are offered as a
bundled package.  Our primary goal is to have a framework that deters carrier gaming while
being competitively neutral, easy to administer, and simple to understand.  Our existing rule
requires carriers to contribute to the universal service support mechanism based on interstate
end-user telecommunications revenue.  We recognize that carriers may bundle goods and
services in a multitude of ways that cannot be anticipated, and thus we afford carriers the
needed flexibility to determine the appropriate allocation of revenues for universal service
support purposes.  In reporting revenues, carriers should remain mindful of their contribution
obligation under our current rule and are expected to exercise good faith in reporting
revenues.  Detailed below are two ways carriers could report revenues that would afford them
"safe harbor" protection under the rule.  The overriding intent is to maintain stability and
predictability in funding the universal service support mechanisms. 
52.    First, contributors may elect to report revenues from bundled telecommunications
and CPE/enhanced service offerings based on the unbundled service offering prices, with no
discount from the bundled offering being allocated to telecommunications services.  For
example, assume that a carrier offers voice-mail service, an enhanced service, as a stand-alone
offering for $6.00, and also offers basic phone service, a telecommunications service, for
$20.00.  The carrier offers the two services for the bundled price of $22.00, resulting in a
discount of $4.00.  Under this approach, the carrier would report telecommunications service
revenue of $20.00 per month (the stand-alone price for the phone service) and non-
telecommunications revenue of $2.00 per month (the stand-alone price for voice-mail minus
the discount from the bundled offering).  As we note in this Order, carriers will likely continue
to offer both bundled and unbundled telecommunications service offerings.  Because
incumbent local exchange carriers will continue to tariff services separately and nondominant
carriers will likely continue to offer unbundled pricing to meet the needs of consumers, this
method provides carriers with an easily ascertainable method of allocating revenues for
purposes of calculating universal service contributions.
53.    Alternatively, contributors may elect to treat all bundled revenues as
telecommunications service revenue for purposes of determining their universal service
obligations.  For example, assume that a carrier offers a bundled package of voice-mail and
basic phone service to end-users at $25.00 per month.  The carrier decides that it cannot
distinguish revenue for the basic service (the telecommunications service) from voice-mail (the
non-telecommunications service).  This carrier would report telecommunications revenue of
$25.00 per month.  This option would permit those contributors that are unable or unwilling
to separate end-user telecommunications revenues from non-telecommunications revenue to
comply with their universal service obligations when they generate revenues from bundled
telecommunications services and CPE/enhanced service offerings.  
54.    These allocation methods are "safe harbors" and will be afforded a presumption of 
reasonableness in an audit or enforcement context.  Both of the above-described methods
enable carriers to allocate revenues for purposes of universal service contributions in an easily
ascertainable and reasonable manner.  These methods also decrease the investigative burden in
an audit or other enforcement proceeding because the necessary information is easily obtained
and verified.  Thus, these allocation methods provide certainty to both carriers and the
Commission, and we encourage their use. 
55.    Carriers may choose to use allocation methods other than the two described above. 
Carriers should realize, however, that any other allocation methods may not be considered
reasonable, and will be evaluated on a case-by-case basis in an audit or enforcement context. 
In evaluating the reasonableness of any alternative methods, we will apply the standards
underlying the safe harbors described above.  For example, carriers should not apply discounts
to telecommunications services in a manner that attempts to circumvent a carrier's obligation
to contribute to the universal service support mechanisms.  Should an audit or enforcement
proceeding be initiated, carriers will need to provide evidence that the amount of reported
telecommunication revenues that they report reflects compliance with the carrier's obligation
to contribute to the universal service support mechanism based on interstate end-user
telecommunications revenue. 
56.    As explained above, the methods outlined in this Order are examples of how
carriers may report revenues for universal service purposes, and carriers may choose to use a
different method altogether.  We adopt this approach in recognition of the fact that, at this
time, we cannot anticipate the various ways in which carriers may choose to bundle their
goods and services.  We conclude that this flexible, simple, and easily administered approach
will continue to maintain stability and predictability in the universal service fund, while
granting carriers considerable freedom in deciding how to bundle their offerings.  Finally, we
note that as we gain experience with carrier practices, we may in the future seek comment
on whether we need to adopt additional rules.
          A.   Impact of Bundling on Network Disclosure and Part 68 Requirements
               1.   CPE Bundling
57.    We conclude that our existing network disclosure policy and rules ensure that
carriers that bundle CPE and transmission services will continue to provide CPE suppliers
with access to information about the carriers' networks that the suppliers require to offer
competitive products.  The Commission sought comment in the Further Notice on whether
the network disclosure requirement promulgated in Computer II that was referred to as the
"all-carrier" rule would provide competitive CPE suppliers with adequate disclosure of a
carrier's network interfaces.  In 1999, the Commission eliminated the "all carrier" rule in a
separate proceeding.  It found that interexchange carriers are not likely to gain the
individual market power that would allow them profitably to withhold information about their
network interfaces that competitive CPE suppliers require, and that the rule, as it applied to
interexchange carriers, was therefore no longer necessary.  We also emphasized that
sections 201 and 202 of the Communications Act impose nondiscrimination requirements that
prohibit carriers that manufacture CPE from favoring their own CPE over that of competitive
suppliers.  We continue to believe that normal market forces pressure interexchange carriers
to provide CPE suppliers with necessary network information, and that sections 201 and 202
of the Act safeguard against anticompetitive conduct in this area.  We therefore do not find
that any additional public disclosure requirements are necessary for interexchange carriers that
bundle CPE with interstate, domestic, interexchange services.
58.    Our rules require incumbent LECs to disclose network changes that could affect
the manner in which CPE is attached to their networks.  When the Commission eliminated
the Computer II "all-carrier" rule, it extended the disclosure requirements in section 51.325(a)
of our rules to require incumbent LECs to provide public notice of any network changes that
will affect CPE manufacturers.  This rule applies to all interconnected CPE whether or not
the incumbent LEC provides the CPE as part of a bundled offering.  It is necessary because
failure to disclose network changes that affect CPE could give incumbent LECs a significant
head start in providing fully compatible equipment and could thereby adversely affect
competition in the CPE market.  While we believe that incumbent LECs, like other carriers,
should have a business incentive to make interconnection to their networks available to all
customers regardless of the type of CPE they use, this rule requires incumbent LECs to
provide the specifications that competitive CPE suppliers need to provide compatible
equipment.  
59.    We also conclude that allowing carriers to bundle CPE with transmission services
will not affect the Commission's requirement that CPE not cause harm to the network.  We
sought comment in the Further Notice on whether the "demarcation point" between telephone
company communications facilities and terminal equipment, as defined in section 68.3 of the
Commission's rules, would change if CPE and interexchange carriers' network offerings
were bundled and what effect, if any, this would have on the Commission's Part 68
program.  In November 2000, the Commission adopted an Order eliminating certain
portions of the Part 68 regulations governing the development of technical criteria and
registration procedures for CPE.  It found that the highly competitive nature of the CPE
market makes it no longer necessary for the Commission to establish technical criteria for
CPE or approve the use of new CPE.  The Commission stated that eliminating these
regulations should bring innovative equipment to the marketplace faster, thereby increasing
choices available to consumers.  Accordingly, our action with regard to Part 68 should
enhance further the ability of consumers to secure new and innovative CPE separately or as
part of a bundled offering.  Allowing carriers to bundle CPE with transmission service does
not affect the technical criteria that the telecommunications industry will now establish on its
own to ensure that CPE does not cause harm to the network, and we agree, in particular, with
KMC that the Further Notice did not contemplate allowing carriers to technically bundle CPE
and telecommunications service in such a way as to contravene the requirement that CPE not
cause harm to the network.  Moreover, as the Commission noted in the Part 68
Streamlining Order, providers of telecommunications have an inherent interest in preventing
harm to the public switched network, and therefore also have an incentive to ensure that
bundled CPE does not cause such harm.

               1.   Enhanced Services Bundling
60.    We find that the Commission's network disclosure rules will also act as an
important safeguard to prevent incumbent LECs that bundle enhanced services with local
exchange service from acting in an anticompetitive manner.  The Commission found, as
several commenters assert in this proceeding, that enhanced service providers remain
dependent on incumbent LECs for local access to their customers, and that we must ensure
that these carriers do not withhold network information that enhanced service providers need
to interconnect with the incumbent LECs' networks.  We recognize that incumbent LECs
may be able to leverage control over their local exchange facilities into market power over
new or existing services if they are allowed to modify network interfaces without disclosing
the changes to competitors.  Our network disclosure rules therefore require all incumbent
LECs to disclose publicly, at a minimum, "complete information about network design,
technical standards and planned changes to the network."  These rules will continue to
apply to incumbent LECs that bundle enhanced services with local exchange service.
     LXI. FINAL REGULATORY FLEXIBILITY ACT ANALYSIS
62.    The Regulatory Flexibility Act (RFA) requires that regulatory flexibility analyses
be prepared for notice and comment rulemaking proceedings, unless the agency certifies that
"the rule will not, if promulgated, have a significant economic impact on a substantial number
of small entities."  The RFA generally defines the term "small entity" as having the same
meaning as the terms "small business," "small organization," and "small governmental
jurisdiction."  The RFA defines a "small business" to be the same as a "small business
concern" under the Small Business Act.  Under the Small Business Act, a "small business
concern" is one that:  (1) is independently owned and operated; (2) is not dominant in its field
of operation; and (3) meets any additional criteria established by the Small Business
Administration (SBA). 
63.    Consistent with the effort to reduce regulation wherever conditions warrant, this
Report and Order reviews the state of competition in the CPE and enhanced services market
to determine if such competition warrants amending the bundling restrictions adopted in the
Computer II Order.  It also reviews the state of competition in the interstate, domestic
interexchange, and local exchange markets to determine the likelihood that nondominant and
incumbent carriers in these markets could engage in anticompetitive behavior if they are
permitted to bundle such telecommunications services with CPE or enhanced services.  In
undertaking this analysis, the Report and Order acknowledges that because the local exchange
market is not fully competitive and because incumbent LECs have market power, the
Commission must balance the risk that incumbents can act anticompetitively with the public
interest benefits of bundling.  In light of the significant benefits of bundling outlined in the
record developed in response to the Further Notice and the state of competition in the various
component markets, the Report and Order finds that it is appropriate to eliminate the CPE
bundling restriction for all carriers.  In the case of enhanced services, it retains the requirement
that facilities-based carriers continue to offer the underlying transmission service component
of an enhanced service on nondiscriminatory terms, and clarifies that as long as the carriers
meet this requirement, they may bundle enhanced services with telecommunications services at
a single price.
64.    We considered the potential impact of the Report and Order on three categories of
entities: "small interexchange carriers;" "small incumbent LECs;" and "small non-incumbent
LECs."  The Report and Order will not have a significant economic impact on a substantial
number of these entities because it relieves them of regulations that have prohibited them from
offering consumers packages of telecommunications services and CPE at a single price. 
Removal of these rules will provide small entities the necessary flexibility to market services
and CPE in a less restricted manner.  In addition, these small entities will not have to incur
certain transactional costs associated with separately offering and billing consumers for the
components of a service package.  In fact, it is expected that any economic impact will be a
positive one.  The Report and Order clarifies that small interexchange carriers, small
incumbent LECs and small non-incumbent LECs may offer packages of enhanced services and
telecommunications services at a single price, provided that they continue to comply with the
existing requirements to offer competitive enhanced service providers access to the underlying
transmission service component of an enhanced service on non-discriminatory terms.  By
clarifying this requirement, the Report and Order provides regulatory certainty.  Therefore,
there is no significant economic impact on such entities.   
65.    In addition, we considered the impact of the proposed rule revisions on
information service providers (ISPs) and other competitive enhanced service providers.  ISPs
that described themselves as small businesses indicated in the record that they could suffer an
economic impact from the rules proposed in the Further Notice if the Commission did not
maintain the requirement that they be able to acquire underlying transmission capacity to
provide enhanced services from the incumbent LECs on nondiscriminatory terms.  We have
maintained this requirement for all incumbent LECs.  ISPs also indicated that they could not
acquire the transmission service on nondiscriminatory terms if incumbent LECs were
permitted to bundle CPE with telecommunications services.  The Report and Order
confirms that the transmission service component of CPE bundles will be separately available
from the incumbent LECs on a non-discriminatory basis.  Therefore, there is no significant
economic impact on small ISPs and small competitive enhanced service providers.  
66.    Accordingly, we certify that the Report and Order will not have a significant
economic impact on a substantial number of small entities.  
67.    The Commission will send a copy of this Report and Order, including a copy of
this final certification, in a report to Congress pursuant to the Small Business Regulatory
Enforcement Fairness Act of 1996.  In addition, the Report and Order and this final
certification will be sent to the Chief Counsel for Advocacy of the Small Business
Administration, and will be published in the Federal Register. 
     LXVIII.   ORDERING CLAUSES
69.    Accordingly, IT IS ORDERED that pursuant to sections 1, 2, 4, 10, 11, 201-205,
215, 218, 220, and 303(r) of the Communications Act of 1934, as amended, 47 U.S.C. 
151, 152, 154, 160, 161, 201-205, 215, 218, 220, and 303(r), this REPORT AND ORDER IS
ADOPTED.
70.    IT IS FURTHER ORDERED that section 64.702(e) of the Commission's Rules,
47 C.F.R.  64.702(e), as set forth in Appendix B hereto, is effective 30 days after publication
in the Federal Register.
71.    IT IS FURTHER ORDERED that the Commission's Consumer Information 

Bureau, Reference Information Center, SHALL SEND a copy of this REPORT AND
ORDER, including the Final Regulatory Flexibility Certification, to the Chief Counsel for
Advocacy of the Small Business Administration.
                    FEDERAL COMMUNICATIONS COMMISSION
                         
                    Magalie Roman Salas
                         Secretary

                  APPENDIX A-LIST OF PARTIES
                (CC Docket Nos. 96-61; 98-183)


Parties are listed and referred to by the name under which they submitted their comments:

AT&T Corp. (AT&T)
American Petroleum Institute (API)
America Online, Inc. (AOL)
Ameritech
Bell Atlantic
BellSouth
Cincinnati Bell Telephone Company (CBT)
Commercial Internet eXchange Association (CIX)
Competitive Telecommunications Association (CompTel)
Consumer Electronics Manufacturers Association (CEMA)
Enterprise Networking Technologies Users Association (ENTUA)
GTE Service Corporation (GTE)
Information Technology Association of America (ITAA)
Internet Service Providers' Consortium (ISP/C)
KMC Telecom, Inc. (KMC)
MCI WorldCom, Inc. (MCI WorldCom)
Mitel, Inc. (Mitel)
Network Plus, Inc. (Network Plus)
Next Level Communications (Next Level)
Public Utilities Commission of Ohio (Ohio PUC)
Nationwide Business Telephone Systems, L.L.C. d/b/a Team Centrex (Team Centrex)
Telecommunications Resellers Association (TRA)
U S West Communications, Inc. (U S West)
SBC Communications Inc. (SBC)
Saco River Telegraph and Telephone Company (Saco River)
Sprint Corporation (Sprint)
Tandy Corporation (Tandy)
United States Telephone Association (USTA)


                    APPENDIX B-FINAL RULES
                               
For the reasons discussed in the preamble, 47 CFR Part 64 is amended as follows:

     PART 64   MISCELLANEOUS RULES RELATING COMMON CARRIERS

1. The authority citation for Part 64 continues to read as follows:  47 U.S.C. 154, 47 U.S.C.
225, 47 U.S.C. 251(e)(1).151, 154, 201, 202, 205, 218-220, 254, 302, 303, and 337 unless
otherwise noted.  Interpret or apply sections 201, 218, 225, 226, 227, 229, 332, 48 Stat.
1070, as amended.  47U.S.C. 201-204, 208, 225, 226, 227, 229, 332, 501 and 503 unless
otherwise noted.

2. Section 64.702 by revising paragraph (e) is amended to read as follows:

* * * * *

(e) Except as otherwise ordered by the Commission, the carrier provision of customer
premises equipment used in conjunction with the interstate telecommunications network may
be offered in combination with the provision of common carrier communications services,
except that the customer premises equipment shall not be offered on a tariffed basis.